Lowe's withdraws C$1.8 billion proposal to buy Rona

Euan Rocha, Dhanya Skariachan

6 Min Read

Lowe's Cos Inc posted better-than-expected quarterly profit on Monday as it saw some strength in outdoor projects like gardens and lawns in the spring, even as consumers still shunned big home renovations. REUTERS/Mike Blake

(Reuters) - Lowe’s Cos Inc said on Monday it has withdrawn its C$1.8 billion ($1.86 billion) proposal to buy Rona Inc in the face of opposition to the unsolicited bid from the Canadian home improvement retailer, its dealers and from politicians in Rona’s home province of Quebec.

Rona, Canada’s home-grown answer to Lowe’s and Home Depot Inc, had rejected the C$14.50-per-share offer proposal, saying it was not the best deal for its stockholders.

Lowe’s move sent Rona shares tumbling 12 percent on Monday to C$11.29 on the Toronto Stock Exchange. The shares, which rose as high as C$14.49 immediately after the proposal was announced in late July, had pulled back since then as investors saw chances of a deal fading.

“It is unfortunate that the Rona board of directors did not recognize the important economic and commercial benefits of this proposal for its stakeholders and for Canada,” the U.S. home improvement chain said in a statement.

The proposal, which never made it to the formal offer stage, became a hot-button issue during Quebec’s recent provincial election, with politicians from both the Liberal Party and the eventual winner of the election, the Parti Quebecois, voicing strong opposition to it.

The separatist Parti Quebecois, which is about to form a minority government, said it was pleased that Lowe’s had withdrawn its offer.

“We greet this decision with relief,” said a spokesman for Quebec Premier-designate Pauline Marois in an email.

The Lowe’s offer also faced opposition from some of Rona’s dealers, who threatened to sever ties with Rona, if Lowe’s prevailed with its offer.

Shares of Lowe’s closed Monday 17 cents lower at $29.23 on the New York Stock Exchange.

“I don’t think the market anticipated this deal going through in the first place,” said RBC Capital Markets Scot Ciccarelli. “I am kind of dismissing it as not a really big surprise here.”

FOCUSED ON BUSINESS PLAN

Rona has fared poorly as Lowe’s and Home Depot have expanded north of the border. However, last month, the company said its second-quarter distribution sales rose 8.7 percent and retail and commercial sales were 1.8 percent higher.

Earlier this year, Rona said it would focus less on big-box stores and would close or reduce the size of some of its biggest outlets to stay competitive. It said research showed customers cared most about the proximity of its stores.

“Rona learned this morning through a press release that Lowe’s withdrew its unsolicited, non-binding acquisition proposal,” said Rona spokeswoman Valérie Lamarre, adding that the company remains focused on implementing its business plan.

Lamarre said the company plans to continue to focus on its three priorities, improving efficiency, optimizing its capital structure, and increasing its return on capital.

After Lowe’s announced its decision, Scotia Capital analyst Anthony Zicha trimmed his rating on Rona to “sector perform” from “sector outperform”, while lowering his target for the company’s shares to C$12 from C$13.

“While we do not expect a deal will materialize in the near term, we continue to believe that Lowe’s acquisition of Rona could make sense,” said Zicha in a note to clients.

“Given the saturated home improvement big box market in Canada, we believe it would be a challenge for Lowe’s big box model to grow significantly in the Canadian market without the acquisition of Rona,” he added.

COMMITTED TO CANADIAN GROWTH

Lowe’s said it still believes that a combination of the two companies would have been a sound business move and would have created significant value for all stakeholders.

“We do remain committed to growing in Canada and are currently evaluating other options including continued organic expansion,” said Lowe’s spokeswoman Julie Yenichek, adding that political opposition to the deal was not a factor in Lowe’s decision to withdraw the proposed offer.

Earlier this month, while speaking at a conference in New York, Lowe’s Chief Executive Robert Niblock said Lowe’s would look at other acquisitions, or a greenfield expansion in Canada, if its bid for Rona failed.

In a note to clients, Barclays analyst Alan Rifkin said he was encouraged that Lowe’s ultimately decided not to pursue the deal further.

“In our view, acquiring Rona would have saddled Lowe’s with a daunting integration that would have limited its ability to focus on rightsizing its U.S. operations,” he said. “Lowe’s was compromising by acquiring Rona’s network of dealer-operated stores, many of which are too small to effectively compete with larger big-box retailers such as Home Depot.”

Lowe’s has lagged larger U.S. rival Home Depot in same-store sales for 13 straight quarters. The company has cut jobs, curbed store expansion plans and streamlined its supply chain to cut costs and compete more effectively, but it has yet to see results.

It recently decided to provide fewer discounts on expensive items such as appliances, in sync with its bigger plan to offer “everyday low prices” rather than promotions.

“While Lowe’s current Canadian platform of 31 stores does lag behind Home Depot’s current platform of 180 stores, its most pressing issues lie in the U.S. - where it continues to be outcomped by Home Depot - and not in Canada,” Rifkin said.